Thursday, August 10, 2017

Rice and Wheat Support Price Policies Up for Reform

A Chinese official signaled that a major reform or even elimination of the country's price floor policy for wheat and rice may be on the horizon, but an official media outlet assured farmers that they need not worry about a drastic policy change that will curb their rising incomes.

In remarks at a rural policy forum held in Beijing, Han Jun--head of the Central Communist Party's Rural Leadership Group--praised the grain price support policies for their role in ensuring food security and protecting farmers' incomes, but he raised concerns about unintended consequences in the current market environment where international prices are far below China's domestic support price levels. Han despaired that the government's financial burden is overwhelming as it holds massive inventories of grain and sells reserves for less than the acquisition cost. High prices in China have eroded the international competitiveness of its commodities, and the gap between Chinese and international prices has prompted a surge of imports and smuggling. Han commented that this cannot continue, and the support price program has now reached a point where it is not immune to change.

Han observed that purchases of grain for government reserves strayed from the original intent of intermittently stabilizing markets to becoming the predominant sales channel. Controlled prices and surging government purchases have decoupled supply from demand and created structural grain surpluses. Han pointed to corn as the commodity with the most pressing problems: in 2014, purchases for the government's "temporary reserve" accounted for 88 percent of corn produced in the northeastern provinces. In 2015--the corn program's final year--reserve purchases ballooned to 125 percent of corn produced in the northeastern provinces as corn from other regions was trucked in to take advantage of the government-set price. Han said 100 million metric tons of corn substitutes imported from 2014 to 2016 were partly responsible for the unintended growth in excess corn reserves. He also cited price supports for prompting smuggling of rice.

Reform of the minimum price program for rice and wheat would be the latest phase of a series of "marketized" price reforms that have been "very smooth," with "results better than expected," Han said. Price reforms began with the abandonment of support price policies for cotton and soybeans in 2014, continued with the reduction of the corn support price in 2015 and the corn price support elimination in 2016. Rapeseed support prices were abandoned in 2015 and excess rapeseed oil reserves have been disposed of, Han said.

Han did not give any details on the prospects for policy changes or when they might take place. The next clue about the program's future may be this fall when Chinese authorities customarily announce the wheat floor price for the following year in late September or early October. There was speculation about the possible end of the minimum price program ahead of last October's announcement, and looks like there will be again this year.

The day after Han's comments were reported, a commentator on the "voice of rural China" assured listeners that they need not worry about rumors about the end of grain price policies, because no changes have been announced by the government. The commentator suggested that rumors circulate because the government doesn't provide any information about their intentions. The commentator then argued for the necessity of agricultural price reforms, assured farmers the government would carefully consider the impact of policy changes on "farmer friends," and warned farmers that short-term pressure is a necessary impact of market competition.

Dr. Han did not mention his past endorsement of the policy strategy that created the problems. In a 2010 interview with Farmers Daily, Han said it was necessary to raise farm prices every year to ensure that farmers could earn a healthy net return as their production costs rose, and high farm prices could be seen as a way of "industry repaying agriculture." Back in 2010, he proclaimed that the world was in an era of permanently high prices.

Seven years ago Han said, "When China has a shortage of grain, the world cannot meet China's demand." This week Han implied that the world is supplying China with too much grain.